CFDs are traded along two basic pricing models:
Each model has advantages and disadvantages. See the above links for more details.
Gearing, sometimes also referred to as leveraging, enables investors to trade with much larger amounts than the amount they need to deposit. For example an investor may purchase $1,000 worth of CFDs, but thanks to gearing will actually purchase $10,000 worth of CFDs. In this case we would say that this investor is geared or leveraged 10:1.
Most CFD traders will allow levels of gearing up to 10:1 for most blue chip stocks.
As with all financial instruments that have high levels of gearing, any gains and losses will be amplified by the gearing ratio. If an investor has a 10:1 gearing ratio, then for each dollar they would have made, they will now make ten, and for each dollar they loose, they will loose a further ten.
It quickly becomes apparent that CFDs are probably not the type of investment best suited to a risk averse investor. A $5,000 highly geared investment could end up costing $50,000!
Still confused? Click here to see a CFD trading example .